Ethics and governance in the European Financial centers

Senator Patrick Leahy (D-Vt.) and Senator Chuck Grassley (R-Iowa) introduced legislation the day before yesterday to provide the federal government with more tools to investigate and prosecute financial fraud. The Fraud Enforcement and Recovery Act makes necessary changes to federal criminal laws, including criminal fraud, securities law, and money laundering laws, increases the funding available to the federal law enforcement agencies to combat mortgage fraud and predatory lending, and also revises the False Claims Act to ensure that the government can recover taxpayer dollars lost to fraud and abuse.

The Leahy-Grassley bill will:

- Amend the definition of “financial institution” to extend federal fraud laws to mortgage lending business not directly regulated or insured by the Federal government
- Amend the major fraud statute to protect funds expended under the Troubled Asset Relief Program (TARP) and the economic stimulus package
- Authorize funding to hire fraud prosecutors and investigators at the Department of Justice, the FBI, and other law enforcement agencies, and authorize funding for U.S. Attorneys’ Offices to help staff FBI mortgage fraud task forces.
- Amend the federal securities statute to cover fraud schemes involving commodities futures and options
- Amend the criminal money laundering statute to make clear that the proceeds of specified unlawful activity include the gross receipts of the illegal activity, and not just the profits of the activity
- Improve the False Claims Act to clarify that the Act was intended to extend to any false or fraudulent claim for government money or property, whether or not the claim is presented to a government official or employee, whether or not the government has physical custody of the money, and whether or not the defendant specifically intended to defraud the government.


Read press release

In my past articles I have underlined that the CSSF, the Luxembourg regulator, and the financial center of Luxembourg in general had and stil have an inadequate communication by:
- not telling the truth on the transposition of the directive,
- not communicating on all the aspects of the issue involving the jurisdiction.

I am afraid the Irish regulator is worse in its communication on Madoff case than the Luxembourg regulator.

When going through the websites of the regulators (CSSF and IFS ) it appears that the IFS has a poor communication. The Irish Regulator communicated on Madoff the first time only a couple of weeks after the Luxembourg regulator.

The IFS issued only one laconic press release dated 7 January 2009 entitled “Bernard L Madoff Investment Securities LLC (“Madoff”) “ that does not quote the involved investment funds in Ireland : “Two funds, one UCITS and one non-UCITS, have exposures to Madoff arising from the appointment of Madoff as sub-custodian to the assets of the funds by the Irish trustee”

It is not the first time that I point out that the Luxembourg regulator is better that the Irish Regulator for the communication (see my article dated 14 October 2006).

A search on the website with the keyword Madoff confirms the feeling:
Search Results
• News (1)
• Remainder of site (1)
Both results are about the only press release dated 7 January.


Even though the CSSF communication in Luxembourg is not sufficient enough in a world of transparency, there is a communication that shows a minimum of respect for the investor:

11 February 2009: Withdrawal of the sicav HERALD (LUX) from the official list
6 February 2009: The Madoff case
6 February 2009: Meeting between UBS and the CSSF regarding the Madoff case
3 February 2009: Withdrawal of Luxalpha Sicav from the official list
23 January 2009: The Madoff case
2 January: The Madoff case
22 December 2008: Bernard L. Madoff and Bernard L. Madoff Investment Securities LLP

A search on the website with the keyword Madoff confirms the positive feeling with nine results.


I wish Luxembourg realised that it must target and fix dysfunctions and “red flags” that harm the Ethical credibility of the center and create the risk with periodic involvement of the jurisdiction.

In an excellent report François-Serge Lhabitant and Greg Gregoriou, from the Edhec Risk and Asset Management Research Centre, highlight some of the salient operational features common to best-of-breed hedge funds - features that were clearly missing from Madoff's operations.
The Edhec position paper looks at the events leading up to the fraud and considers how the alleged split-strike conversion strategy would have worked before exploring the due diligence aspects of the case in detail.
Among the areas which should have been seen as a concern, the authors say, were operational red flags and investment red flags

Operational red flags were :
- lack of segregation amongst service providers,
- obscure auditors,
- an unusual fee structure,
- heavy family influence,
- lack of disclosure,
- insufficient staff,

Investment red flags were :
- black-box strategy,
- questionable style exposures,
- incoherent 13F filings,
- excessive market size.



Most of the identified operational red flags are definitely met in luxembourg :
- lack of segregation amongst service providers,
- obscure auditors,
- heavy family influence,
- lack of disclosure,
- insufficient staff.


Read paper